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Constructive Ambiguity: Greek Debt Deal A Big Can-Kick, Not A Solution For Insolvency

“Constructive ambiguity,” as French Finance Minister Pierre Moscovici put it, is the best way to describe the Eurogroup’s latest deal on Greece. While the troika and the IMF managed to bridge the gap and avoid a new Greek default, and probable EMU exit in the medium-term, the terms of the latest deal are by no means enough to put Athens on track to solvency by 2020 or 2022, according to Barclays’ European economics group. Without an outright haircut of at least 20% on public sector holdings of Greek sovereign debt and fresh funds for debt relief, Greece will continue to languish while on life support.

Regardless, the deal announced in the wee-hours of Monday is a definite step in the right direction. Athens will finally receive the funds it has been waiting for since summer, its cash-strapped coffers once again filled with money borrowed from its European neighbors. The longer-term problem is still on the table, but it will have to wait.

After much discussion between the International Monetary Fund, headed by former French finance minister Christine Lagarde, and the Eurogroup, and between France and Germany within the European institution, finance chiefs from across the Old Continent reached a comprehensive deal that resulted from Greece’s continued adherence to the conditionality and austerity programs forced on it.

Greece” style=”padding: 1px; color: #000; background: #ddd;” class=”mceWPmore” type=”place” active=”false” key=”greece” natural_id=”places/country/127″>Greece will receive a total of €43.7 billion ($56.5 billion) in four tranches, the first chunk next month. Around mid-December Athens should be getting €23.8 billion ($30.8 billion) in EFSF funds for bank recapitalizations and €10.6 billion ($13.7 billion) for budgetary finance from its EU counterparts. The remaining €9.3 billion ($12 billion) will be disbursed in three sub-tranches in the first quarter of 2013 and will be “linked to the implementation of the MoU milestones (including the implementation of the agreed tax reform by January) to be agreed by the troika,” according to the official statement.

Prime Minister Antonis Samaras breathed a sigh of relief, telling his people “a new day begins for all Greeks,” after the decision. Since passing a much rioted-against 2013 austerity budget, Samaras put the pressure on the Troika to give him some breathing room, and he got it: Greece will now have two more years to reach a primary balance of 4.55% (by 2016), and debt-to-GDP ratios will have to fall to 124% of GDP by 2020. The latter was an IMF concession, as Lagarde’s institution was pushing for the more stringent figure of 120% by the date; still, the Eurogroup announced the debt load will fall below 110% two years after.

It seems highly unlikely that Greece will hit those targets given the current terms of the deal, according to Barclays’ analysts. Even troika projections have debt-to-GDP hitting 190% in 2013, according to German daily Der Spiegel, which notes that a further haircut on Greek debt is essentially the only way out.

The troika did offer further relief to Greece: they extended the repayment period on bailout loans by 15 years to 30 years and lowered interest rates by 100 basis points, fees on EFSF loans were cut 10 basis points and payments deferred by 10 years, and they engineered a bond buyback.

This latter point was of utmost importance. While the IMF conceded on the debt-to-GDP targets, she said her institution wouldn’t release its part of the bailout money (less than one-third of the tranche) until the buybacks are executed. Little data was released on these buybacks, which Reuters said was to avoid giving hedge funds any leverage; reports indicate they would consist of a €10 billion ($12.9 billion) program to buy back debt from private investors at 35 cents on the euro.

Also, the Eurogroup agreed to give Athens about €11 billion ($14.2 billion) in profits from ECB bond purchases in the secondary market under its SMP program, which would be deposited in a segregated account used for debt servicing, closely monitored by the troika.

“The Eurogroup concludes that the necessary elements are now in place for Member States to launch the relevant national procedures required for the approval of the next EFSF disbursement,” read the statement, as Germany, Finland, and the Netherlands prepare for the proper parliamentary votes on the matter.

The latest debt deal definitely does enough to ensure the Eurozone’s most highly indebted country will remain in the monetary union in the near to medium-term. What is clear, at least according to the econometric models of Barclays’ analysts, is that there is no way this deal solves the issue at hand. “Some of the measures are steps in the right direction; however, we think that, as they were announced last night, they will be not sufficient to reduce public debt substantially and so to restore debt solvency by 2020,” they explained, adding:

We continue to think that, without public sector involvement (through an outright haircut on EU loans of at least 20%), and fresh funds to implement the buyback, public debt will remain well above the solvency threshold of 120% of GDP by 2020. As such, as

our strategists also noted earlier this morning, we think that the positive response of the market might prove short-lived.

And short-lived it was. After hitting four-week highs early in the session, the euro-dollar exchange rate slid back to 1.2939, while major European indexes cut back on their gains through the session. Gold prices were down 0.3% to $1,747.70 an ounce. Major European banks like Credit Suisse and Deutsche Bank were trading mixed on Tuesday in New York, performing better than American names like Wells Fargo, Citigroup, and Goldman Sachs which were all in the red by 2:21 PM.

The European sovereign debt crisis has come a long way since Greece was initially bailed out as its economy collapsed. With Mario Draghi at the helm of the ECB and Germany’s Angela Merkel lurking in the background, Greece has been kept in the Eurozone because the most powerful people in region decided it was the best for the collective good. The price tag of doing so has only kept on rising, but the counterfactual sounds even scarier. By now, they’re past the point of no return.

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